Blue Collar Clothing, Inc. acquired a new fabric- cutting machine at the beginning of the current year. The machine cost $ 600,000, with no residual value expected. Blue Collar uses the straight- line method for financial reporting assuming a six- year useful life. The firm classifies the equipment as five- year MACRS property for tax purposes using the following percentages.
Year MACRS %
1 ……………20.00%
2 …………… 32.00%
3 …………… 19.20%
4 …………… 11.52%
5 …………… 11.52%
6 …………… 5.76%
The company is subject to a 40% income tax rate and has no other book- tax differences. We present Blue Collar’s income before tax and depreciation below:
Year Income Before Tax and Depreciation
1 ………………………$ 850,000
2 ……………………… 900,000
3 ……………………… 930,000
4 ………………………1,100,000
5 ………………………1,400,000
6 ………………………1,850,000
Required
(Show all supporting computations.)
a. Prepare all journal entries required to record Blue Collar’s income tax provision for years 3 and 4.
b. What is the balance of the deferred tax account at the end of year 3?
c. What is reported net income for years 3 and 4?